- I Introduction and Motivation for International Finance
- 1 Why does the Existence of Borders Matter for Finance?
- 1.1 Key Issues in International Business Finance
- 1.1.1 Exchange-rate Risk
- 1.1.2 Segmentation of the Consumer-good Markets
- 1.1.3 Credit risk
- 1.1.4 Political risk
- rate Governance 1.1.5 Capital-Market Segmentation Issues, including Aspects of Corpo-
- 1.1.6 International Tax Issues
- 1.2 What is on the InternationalCFO’s desk?
- 1.2.1 Valuation
- 1.2.2 Funding
- 1.2.3 Hedging and, more Generally, Risk Management
- 1.2.4 Interrelations Between Risk Management, Funding and Valuation
- 1.3 Overview of this Book
- 1.3.1 Part I: Motivation and Background Matter
- 1.3.2 Part II: International Financial Markets
- 1.3.3 Part III: Exchange Risk, Exposure, and Risk Management
- 1.3.4 Part IV: Long-term Financing and Investment Decisions
- 1.1 Key Issues in International Business Finance
- 2 International Finance: Institutional Background
- 2.1 Money and Banking: A Brief Review
- 2.1.1 The Roles of Money
- 2.1.2 How Money Is Created
- 2.2 The International Payment Mechanism
- 2.2.1 Some Basic Principles
- riodic Netting 2.2.2 Domestic Interbank Transfers: Real-time Gross Settlement vs. Pe-
- 2.2.3 International payments
- 2.2.1 Some Basic Principles
- 2.3 International (“Euro”) Money and Bond Markets
- 2.4 What is the Balance of Payments?
- 2.4.1 Definition & Principles Underlying the Balance of Payments
- 2.4.2 Some Nitty-gritty
- 2.4.3 Statistical Discrepancy/Errors and Omissions
- 2.4.4 Where do Current Account Surpluses or Deficits Come From?
- 2.4.5 The Net International Investment Account
- 2.5 Exchange-rate Regimes
- 2.5.1 Fixed Exchange Rates Relative to Gold
- 2.5.2 Fixed Exchange Rates vis-`a-vis a Single Currency xii CONTENTS
- 2.5.3 Fixed Exchange Rates Relative to a Basket
- Monetary System 2.5.4 The 1979–1993 Exchange Rate Mechanism (ERM) of the European
- 2.5.5 Other Exchange Rate Systems
- 2.6 Test Your Understanding
- 2.6.1 Quiz Questions
- 2.6.2 Applications
- 2.1 Money and Banking: A Brief Review
- II Currency Markets
- 3 Spot Markets for Foreign Currency
- 3.1 Exchange Rates
- 3.1.1 Definition of Exchange Rates
- 3.1.2 Our Convention: Home Currency per Unit of Foreign Currency
- 3.1.3 The Indirect Quoting Convention
- 3.1.4 Bid and Ask Rates
- 3.1.5 Primary ratesvcross rates
- 3.1.6 Inverting Exchange Rates in the Presence of Spreads
- 3.2 Major Markets for Foreign Exchange
- 3.2.1 How Exchange Markets Work
- 3.2.2 Markets by Location and by Currency
- 3.2.3 Markets by Delivery Date
- 3.3 The Law of One Price for Spot Exchange Quotes
- 3.3.1 Arbitrage across Competing Market Makers
- 3.3.2 Shopping Around across Competing Market Makers
- 3.3.3 Triangular Arbitrage
- 3.4 TranslatingFCFigures: Nominal rates,PPPrates, and Deviations fromPPP
- 3.4.1 ThePPPrate
- 3.4.2 Commodity Price Parity
- 3.4.3 The Real Exchange Rate and (Deviations from) AbsolutePPP
- 3.4.4 The Change in the Real Rate and (deviations from) RelativePPP
- 3.5 CFO’s Summary
- 3.6 TekNotes
- 3.7 Test Your Understanding
- 3.7.1 Quiz Questions
- 3.7.2 Applications
- 3.1 Exchange Rates
- 4 Understanding Forward Exchange Rates for Currency
- 4.1 Introduction to Forward Contracts
- 4.2 The Relation Between Exchange and Money Markets
- 4.3 The Law of One Price and Covered Interest Parity
- 4.3.1 Arbitrage and Covered Interest Parity
- 4.3.2 Shopping Around (The Pointlessness of —)
- 4.3.3 Unfrequently Asked Questions onCIP
- 4.4 The Market Value of an Outstanding Forward Contract
- 4.4.1 A general formula
- 4.4.2 Corollary 1: The Value of a Forward Contract at Expiration
- 4.4.3 Corollary 2: The Value of a Forward Contract at Inception
- Future Spot Rate 4.4.4 Corollary 3: The Forward Rate and the Risk-Adjusted Expected
- 4.4.5 Implications for Spot Values; the Role of Interest Rates
- bilities 4.4.6 Implications for the Valuation of Foreign-Currency Assets or Lia-
- 4.4.7 Implication for the Relevance of Hedging
- 4.5 CFO’s Summary
- 4.6 Appendix: Interest Rates, Returns, and Bond Yields
- 4.6.1 Links Between Interest Rates and Effective Returns
- 4.6.2 Common Pitfalls in Computing Effective Returns
- 4.7 Appendix: The Forward Forward and the Forward Rate Agreement
- 4.7.1 Forward Contracts on Interest Rates
- 4.7.2 WhyFRAs Exist
- 4.7.3 The Valuation ofFFs (orFRAs)
- 4.7.4 Forward Interest Rates as the Core of the Term Structure(s)
- 4.8 Test Your Understanding
- 4.8.1 Quiz Questions
- 4.8.2 Applications
- 5 Using Forwards for International Financial Management
- 5.1 Practical Aspects of Forwards in Real-world Markets
- 5.1.1 Quoting Forward Rates with Bid-Ask Spreads
- 5.1.2 Provisions for Default
- 5.2 Using Forward Contracts (1): Arbitrage
- 5.2.1 Synthetic Forward Rates
- 5.2.2 Implications of Arbitrage and Shopping-around
- 5.2.3 Back to the Second Law
- 5.3 Using Forward Contracts (2): Hedging Contractual Exposure
- 5.3.1 Measuring Exposure from Transactions on a Particular Date
- Date 5.3.2 Hedging Contractual Exposure from Transactions on a Particular
- 5.3.1 Measuring Exposure from Transactions on a Particular Date
- 5.4 Using Forward Contracts (3): Speculation
- 5.4.1 Speculating on the Future Spot Rate
- 5.4.2 Speculating on the Forward Rate or on the Swap Rate
- tions 5.5 Using Forward Contracts (4): Minimizing the Impact of Market Imperfec-
- 5.5.1 Shopping Around to Minimize Transaction Costs
- 5.5.2 Swapping for Tax Reasons
- 5.5.3 Swapping for Information-cost Reasons
- 5.5.4 Swapping for Legal Reasons: Replicating Back-to-Back Loans
- 5.6 Using the Forward Rate in Commercial, Financial and Accounting Decisions
- 5.6.1 The Forward Rate as the Intelligent Accountant’s Guide
- 5.6.2 The Forward Rate as the Intelligent Salesperson’s Guide
- 5.6.3 The Forward Rate as the IntelligentCFO’sGuide
- 5.7 CFO’s Summary
- 5.7.1 Key Ideas for Arbitrageurs, Hedgers, and Speculators
- 5.7.2 The Economic Roles of Arbitrageurs, Hedgers, and Speculators
- 5.8 Test Your Understanding
- 5.8.1 Quiz Questions
- 5.8.2 Applications
- 5.1 Practical Aspects of Forwards in Real-world Markets
- 6 The Market for Currency Futures xiv CONTENTS
- 6.1 Handling Default Risk in Forward Markets: Old & New Tricks
- 6.1.1 Default Risk and Illiquidity of Forward Contracts
- 6.1.2 Standard Ways of Reducing Default Risk in the Forward Market
- tracting 6.1.3 Reducing Default Risk by Variable Collateral or Periodic Recon-
- 6.2 How Futures Contracts Differ from Forward Markets
- 6.2.1 Marking to Market
- 6.2.2 Margin Requirements
- 6.2.3 Organized Markets
- 6.2.4 Standardized Contracts
- 6.2.5 The Clearing Corporation
- 6.2.6 How Futures Prices Are Reported
- 6.3 Effect of Marking to Market on Futures Prices
- 6.4 Hedging with Futures Contracts
- 6.4.1 The Generic Problem and its Theoretical Solution
- 6.4.2 Case 1: The Perfect Match
- 6.4.3 Case 2: The Currency-Mismatch Hedge or Cross-Hedge
- 6.4.4 Case 3: The Delta hedge
- 6.4.5 Case 4: The Cross-and-Delta hedge
- 6.4.6 Adjusting for the Sizes of the Spot Exposure and the Futures Contract
- 6.4.7 More About Regression-based Hedges
- 6.4.8 Hedging with Futures Using Contracts on More than One Currency
- Forward Contracts 6.5 The CFO’s conclusion: Pros and Cons of Futures Contracts Relative to
- 6.6 Appendix: Eurocurrency Futures Contracts
- 6.6.1 The Forward Price on aCD.
- 6.6.2 Modern Eurodollar Futures Quotes
- 6.7 Test Your Understanding
- 6.7.1 Quiz Questions
- 6.7.2 Applications
- 6.1 Handling Default Risk in Forward Markets: Old & New Tricks
- 7 Markets for Currency Swaps
- 7.1 How the Modern Swap came About
- 7.1.1 The Grandfather Tailor-made Swap:IBM-WB.
- 7.1.2 Subsequent Evolution of the Swap Market
- 7.2 The Fixed-for-Fixed Currency Swaps
- 7.2.1 Motivations for Undertaking a Currency Swap
- 7.2.2 Characteristics of the Modern Currency Swap
- 7.3 Interest Rate Swaps
- 7.3.1 Coupon Swaps (Fixed-for-Floating)
- 7.3.2 Base Swaps
- 7.4 Cross-Currency Swaps
- 7.5 CFO’s Summary
- 7.6 TekNotes
- 7.7 Test Your Understanding
- 7.7.1 Quiz Questions
- 7.7.2 Applications
- 7.1 How the Modern Swap came About
- 8 Currency Options (1): Concepts and Uses
- 8.1 An Introduction to Currency Options
- 8.1.1 Call Options CONTENTS xv
- 8.1.2 Put Options
- 8.1.3 Option Premiums and Option Writing
- 8.1.4 European-style Puts and Calls as Chopped-up Forwards
- 8.1.5 Jargon: Moneyness, Intrinsic Value, and Time Value
- 8.2 Institutional Aspects of Options Markets
- 8.2.1 Traded Options
- 8.2.2 Over-The-Counter Markets
- 8.3 An Aside: Futures-style Options on Futures
- 8.3.1 Options on Currency Futures
- 8.3.2 Forward-style options
- 8.3.3 Futures-Style Options
- 8.3.4 Futures-Style Options on Futures
- 8.4 Using Options (1): Arbitrage
- 8.5 Using Options (2): Hedging
- 8.5.1 Hedging the Risk of a Loss without Eliminating Possible Gains
- 8.5.2 Hedging Positions with Quantity Risk
- 8.5.3 Hedging Nonlinear Exposure
- 8.6 Using Options (3): Speculation
- 8.6.1 Speculating on the Direction of Changes
- 8.6.2 Speculating on Changes in Volatility
- 8.7 CFO’s Summary
- 8.8 Test Your Understanding
- 8.8.1 Quiz Questions
- 8.8.2 Applications
- 8.1 An Introduction to Currency Options
- 9 Currency Options (2): Hedging and Valuation
- 9.1 The Logic of Binomial Option Pricing: One-period Problems
- 9.1.1 The Replication Approach
- 9.1.2 The Forward Hedging Approach
- 9.1.3 The Risk-Adjusted Probability Interpretation
- 9.1.4 American-style Options
- 9.2 Notation and Assumptions for the Multiperiod Binomial Model
- 9.2.1 The Standard Version of the Binomial Model
- 9.2.2 Does the Model make Sense?
- 9.2.3 Further Notation
- 9.2.4 How to Chooseuandd?
- 9.3 Stepwise Multiperiod Binomial Option Pricing
- 9.3.1 Dynamic Hedging or Replication: a European-style option
- 9.3.2 What can go Wrong?
- 9.3.3 American-style Options
- 9.4 Toward Black-Merton-Scholes (European Options)
- 9.4.1 A Shortcut for European Options
- 9.4.2 The General Formula
- 9.4.3 The Delta of an Option
- 9.5 CFO’s Summary
- 9.6 TekNotes
- 9.7 Test Your Understanding
- 9.7.1 Quiz Questions
- 9.7.2 Applications
- 9.1 The Logic of Binomial Option Pricing: One-period Problems
- III Exchange Risk, Exposure, and Risk Management xvi CONTENTS
- 10 Do We Know What Makes Forex Markets Tick?
- 10.1 The behavior of spot exchange rates
- 10.1.1 Why Levels of (log) exchange rates have bad statistical properties
- 10.1.2 Changes in log rates: findings
- 10.1.3 Concluding Discussion
- 10.2 The PPP Theory and the behavior of the Real Exchange Rate.
- 10.2.1 Issues withPPPTests
- 10.2.2 Computations and Findings
- 10.2.3 Concluding Discussion
- 10.3 Exchange Rates and Economic Policy Fundamentals
- 10.3.1 The Monetary Approach to the Exchange Rate
- 10.3.2 Computations and Findings
- 10.3.3 Real Business Cycle Models
- 10.3.4 Taylor Rule Models
- 10.3.5 Concluding discussion
- 10.4 Conclusion
- 10.1 The behavior of spot exchange rates
- 11 Do Forex Markets Themselves See What’s Coming?
- 11.1 The Forward Rate as a Black-Box Predictor
- 11.1.1 How to Verify the Forward Rate’s Performance as a Predictor
- 11.1.2 Statistical Analysis of Forecast Errors: Computations and findings
- 11.1.3 Trading rules
- 11.1.4 The Forward Bias: Concluding discussion
- 11.2 Forecasts by Specialists
- 11.2.1 Forecasts Implied by Central Bank Interventions
- 11.2.2 Evaluating the Performance of Professional Traders and Forecasters
- 11.3 TheCFO’s summary
- 11.4 Test Your Understanding
- 11.4.1 Quiz Questions
- 11.1 The Forward Rate as a Black-Box Predictor
- 12 (When) Should a Firm Hedge its Exchange Risk?
- 12.1 The effect of corporate hedging may not just be “additive”
- Distress 12.1.1 Corporate Hedging Reduces Costs of Bankruptcy and Financial
- 12.1.2 Hedging Reduces Agency Costs
- 12.1.3 Hedging Reduces Expected Taxes
- Making 12.1.4 Hedging May Also Provide Better Information for Internal Decision
- holders, and Pleases Wall Street 12.1.5 Hedged Results May Better Show Management’s Quality to Share-
- 12.2 FAQs about hedging
- made Hedging? 12.2.1 FAQ1: Why can’t Firms leave Hedging to the Shareholders—Home-
- 12.2.2 FAQ2: Does Hedging make the Currency of Invoicing Irrelevant?
- So how can you call this a Zero-cost Option?” 12.2.3 FAQ3: “My Accountant tells me that Hedging has cost me 2.17m.
- Interest Rates are so Different Across Currencies?” 12.2.4 FAQ4: “Doesn’t Spot Hedging Affect the Interest Tax Shield, as
- 12.3 CFO’s Summary
- 12.4 Test Your Understanding CONTENTS xvii
- 12.4.1 Quiz Questions
- 12.4.2 Applications
- 12.1 The effect of corporate hedging may not just be “additive”
- 13 Measuring Exposure to Exchange Rates
- 13.1 The Concepts of Risk and Exposure: a brief survey
- 13.2 Contractual-Exposure Hedging and its Limits
- 13.2.1 What does Management of Contractual Exposure Achieve?
- 13.2.2 How Certain are Certain Cashflows Anyway?
- 13.2.3 Hedging “Likely” Cashflows: what’s new?
- 13.3 Measuring and Hedging of Operating Exposure
- 13.3.1 Operating Exposure Comes in all Shapes & Sizes
- erating Exposure 13.3.2 The Minimum-Variance Approach to Measuring and Hedging Op-
- 13.3.3 Economic Exposure:CFO’s Summary
- 13.3.1 Operating Exposure Comes in all Shapes & Sizes
- 13.4 Accounting Exposure
- 13.4.1 Accounting Exposure of Contractual Forex Positions
- 13.4.2 Why Firms Need to Translate Financial Statements
- 13.4.3 The Choice of Different Translation Methods
- 13.4.4 Accounting Exposure:CFO’s Summary
- 13.5 Test Your Understanding: contractual exposure
- 13.5.1 Quiz Questions
- 13.5.2 Applications
- 13.6 Test Your Understanding: Operating exposure
- 13.6.1 Quiz Questions
- 13.6.2 Applications
- 14 Value-at-Risk: Quantifying Overall net Market Risks
- 14.1 Risk Budgeting—a Factor-based, Linear Approach
- 14.1.1 Factors and Exposures: a Sneak Preview
- 14.1.2 Domestic Interest risk
- 14.1.3 Equity Investments
- 14.1.4 Foreign Bonds; Currency Forwards and Swaps; Options
- 14.1.5 Aggregates for the portfolio as a whole
- 14.2 The Linear/Normal VaR Model: Potential Flaws & Corrections
- 14.2.1 A Zero-Drift (“Martingale”) Process
- 14.2.2 A Constant-Variance Process
- 14.2.3 Constant Linear Relationships Between Factors.
- 14.2.4 Linearizations in the Mapping from Factors to Returns
- 14.2.5 Choice of the factors
- 14.2.6 Normality of Changes in the Portfolio Value
- 14.2.7 All Assets can be Liquidated in one Day
- 14.2.8 Parametric VaR: Summing up
- 14.3 Historical Backtesting, Bootstrapping, Monte Carlo, and Stress Testing
- 14.3.1 Backtesting
- 14.3.2 Bootstrapping and Monte Carlo Simulation
- 14.3.3 Stress Testing
- 14.4 CFO’s summary
- 14.5 Test Your Understanding
- 14.5.1 Quiz Questions
- 14.5.2 Applications
- 14.1 Risk Budgeting—a Factor-based, Linear Approach
- 15 Managing Credit Risk in International Trade xviii CONTENTS
- 15.1 Payment Modes Without Bank Participation
- 15.1.1 Cash Payment after Delivery
- 15.1.2 Cash Payment before Shipping
- 15.1.3 Trade Bills
- 15.1.4 The Problems with Legal Redress
- 15.2 Documentary Payment Modes with Bank Participation
- 15.2.1 Documents against Payment
- 15.2.2 Documents against Acceptance
- Credit 15.2.3 Obtaining a Guarantee from the Importer’s Bank: The Letter of
- 15.2.4 AdvisedL/Cs and ConfirmedL/Cs
- 15.3 Other Standard Ways to cope with Default Risk
- 15.3.1 Factoring
- 15.3.2 Credit Insurance
- 15.3.3 Export-Backed Financing
- 15.4 CEO’s Summary
- 15.5 Test your Understanding
- 15.5.1 Quiz Questions
- 15.5.2 Applications
- 15.1 Payment Modes Without Bank Participation
- IV Long-Term International Funding and Direct Investment
- 16 International Fixed-Income Markets
- 16.1 “Euro” Deposits and Loans
- 16.1.1 Historic, Proximate Causes of Euromoney’s growth
- 16.1.2 Comparative Advantages in the Medium Run
- 16.1.3 Where we are now: a Truly International Market
- 16.1.4 International Deposits
- 16.1.5 International Credits and Loans
- 16.2 International Bond & Commercial-paper Markets
- 16.2.1 Why Eurobond Markets Exist
- 16.2.2 Institutional Aspects of the International Bond Market
- 16.2.3 Commercial Paper
- 16.3 How to Weigh your Borrowing Alternatives
- 16.3.1 Comparing all-in Costs of Alternatives in Open, Developed Markets
- Markets 16.3.2 Comparing all-in Costs of Alternatives in Regulated, Incomplete
- 16.3.1 Comparing all-in Costs of Alternatives in Open, Developed Markets
- 16.4 CFO’s Summary
- 16.5 Test Your Understanding
- 16.5.1 Quiz Questions
- 16.5.2 Applications
- 16.1 “Euro” Deposits and Loans
- 17 Segmentation and Integration in the World’s Stock Exchanges
- 17.1 Background Information on International Stock Markets
- 17.1.1 How Large and how International are Stock Markets?
- 17.1.2 How do Stock Markets Work?
- 17.1.3 Certificates, Receipts: Different Aliases for a Company’s Stocks
- 17.2 Why don’t Exchanges Simply Merge?
- 17.2.1 Home bias
- ronment 17.2.2 Differences in Corporate Governance and Legal/Regulatory Envi-
- 17.2.1 Home bias
- 17.3 Can Unification be Achieved by A Winner Taking All?
- 17.3.1 CentripetalvCentrifugal Effects in Networks
- 17.3.2 Clienteles for Regional and Niche Players?
- 17.3.3 Even New York is not perfect
- 17.3.4 London’s Comeback
- 17.4 TheCEO’s Summary
- 17.5 Test Your Understanding
- 17.5.1 Quiz Questions
- 17.1 Background Information on International Stock Markets
- 18 Why—or when—Should we Cross-list our Shares?
- 18.1 Why Might Companies Want to list Shares Abroad?
- 18.1.1 Possible Gains from Foreign or Cross-listings
- 18.1.2 Costs of a cross-listing
- 18.2 Shareholders Likely Reaction to Diversification Opportunities
- 18.2.1 Why would Investors Diversify Internationally?
- Exploration 18.2.2 Why would Companies Prefer Global Investors? a Partial-equilibrium
- 18.2.1 Why would Investors Diversify Internationally?
- 18.3 Sifting Through The Empirics on Cross-listing Effects
- 18.3.1 The 1980-2000 Conventional Wisdom
- 18.3.2 Puzzles with the Received Wisdom
- 18.3.3 Five Lessons from the Recent Lit
- 18.4 TheCFO’s Summary
- 18.5 Test Your Understanding
- 18.5.1 Quiz Questions
- 18.1 Why Might Companies Want to list Shares Abroad?
- 19 Setting the Cost of International Capital
- counting and Translation 19.1 The Link between Capital-market Segmentation and the Sequencing of Dis-
- 19.2 The Single-Country CAPM
- 19.2.1 How Asset Returns Determine the Portfolio Return
- 19.2.2 The Tangency Solution: Graphical Discussion
- Return 19.2.3 How Portfolio Choice Affects Mean and Variance of the Portfolio
- 19.2.4 Efficient Portfolios: A Review
- 19.2.5 The Market Portfolio as the Benchmark
- 19.2.6 A Replication Interpretation of theCAPM.
- 19.2.7 When to Use the Single-CountryCAPM
- 19.3 The International CAPM
- 19.3.1 International diversification and the traditional CAPM
- Model 19.3.2 Why Exchange Risk Pops up in the International Asset Pricing
- 19.3.3 Do Assets have a Clear Nationality?
- 19.3.4 The InternationalCAPM
- 19.3.5 The N-CountryCAPM.
- 19.3.6 Empirical Tests of the InternationalCAPM
- 19.3.1 International diversification and the traditional CAPM
- 19.4 The CFO’s SummaryreCapital Budgeting
- 19.4.1 Determining the Relevant Model
- 19.4.2 Estimating the Risk of a Project
- 19.4.3 Estimating the Risk premia
- 19.5 Technical Notes xx CONTENTS
- 19.6 Test Your Understanding: basics of theCAPM
- 19.6.1 Quiz Questions
- 19.6.2 Applications
- 19.7 Test Your Understanding: iCAPM
- 19.7.1 Quiz Questions
- 19.7.2 Applications
- 20 International Taxation of Foreign Investments
- 20.1 Forms of Foreign Activity
- 20.1.1 Modes of Operation (1): A Managerial Perspective
- 20.1.2 Modes of Operation (2): A Legal Perspective
- 20.1.3 Modes of Operation (3): A Fiscal Perspective
- 20.2 Multiple Taxation versus Tax Neutrality
- 20.2.1 Tax Neutrality
- 20.3 International Taxation of a Branch (1): the Credit System
- 20.3.1 Disagreement on the Tax Basis
- 20.3.2 The Problem of Excess Tax Credits
- 20.3.3 Tax Planning for a Branch under the Credit System
- 20.4 International Taxation of a Branch (2): the Exclusion System
- 20.4.1 Partial Exclusion and Progressive Taxes
- 20.4.2 Disagreement on the Tax Basis
- 20.4.3 Tax Planning for a Branch under the Exclusion System
- 20.5 Remittances from a Subsidiary: An Overview
- 20.5.1 Capital Transactions
- 20.5.2 Dividends
- 20.5.3 Other Forms of Remittances (Unbundling)
- 20.5.4 Transfer Pricing
- 20.6 International Taxation of a Subsidiary (1): the Credit System
- 20.6.1 Direct and Indirect Tax Credits on Foreign Dividends
- 20.6.2 Tax Planning through Unbundling of the Intragroup Transfers
- 20.7 International Taxation of a Subsidiary (2): the Exclusion System
- 20.8 CFO’s Summary
- 20.9 Test Your Understanding
- 20.9.1 Quiz Questions
- 20.9.2 Applications
- 20.1 Forms of Foreign Activity
- 21 Putting it all Together: International Capital Budgeting
- 21.1 Domestic Capital Budgeting: A Quick Review
- 21.1.1 Net Present Value (NPV)
- 21.1.2 Adjusted Net Present Value (ANPV)
- 21.1.3 The Interest Tax Shield Controversy
- Capital 21.1.4 Why We UseANPVRather than the Weighted Average Cost of
- 21.2 i-NPVissue #1: How to Deal with the Implications of Non-equity Financing
- 21.2.1 Step 1: The Branch Scenario or Bundled Approach
- 21.2.2 Step 2: The Unbundling Stage
- 21.2.3 Step 3: The Implications of External Financing
- 21.3 i-NPVissue #2: How to Deal with Exchange Rates
- 21.4 i-NPVissue #3: How to Deal with Political Risks
- 21.4.1 Proactive Management of Transfer Risk
- 21.4.2 Management of Transfer Risk after the Imposition of Capital Controls CONTENTS xxi
- 21.4.3 How to Account for Transfer Risk inNPVCalculations
- 21.4.4 Other Political Risks
- 21.5 Issue #4: Make sure to Include All Incremental Cash Flows
- 21.6 Other Things to do in Spreadsheets While you’re There
- 21.7 CFO’s summary
- 21.8 TekNotes
- 21.9 Test Your Understanding
- 21.9.1 Quiz Questions
- 21.9.2 Applications
- 21.1 Domestic Capital Budgeting: A Quick Review
- 22 Negotiating a Joint-Venture Contract: the NPV Perspective
- 22.1 The Three-Step Approach to Joint-Venture Capital Budgeting
- 22.2 A Framework for Profit Sharing
- Capital Markets 22.3 Case I: A Simple Pro-Rata Joint Branch with Neutral Taxes and Integrated
- 22.4 Case II: Valuing A Pro-Rata Joint Branch When Taxes Differ
- agement Contract 22.5 Case III: An Unbundled Joint Venture with a License Contract or a Man-
- 22.5.1 Possible Motivations for a License Contract
- 22.5.2 The Equal-Gains Principle with a License Contract
- Given 22.5.3 Finding Fair Equity Share when Terms of License Contract Are
- 22.5.4 Finding the Fair Royalty for a Given Equity Share
- 22.6 CFO’s Summary & Extensions
- 22.7 Test Your Understanding
- 22.7.1 Quiz Questions
- 22.7.2 Applications
chris devlin
(Chris Devlin)
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